Solid exports amid lower imports as well as smaller services deficit in 1Q14 helped widened the current account (CA) balance to RM19.8b from RM14.8b in 4Q13. Meanwhile, the onslaught of capital outflows had sharply widened the deficit in the capital account to RM37.6b from RM9.8b. For the rest of the year we expect improving exports to support the CA balance. This would help to support the ringgit (MYR) though some downward pressure would still come from continued capital outflows on the back of the impact of QE tapering by the Fed. Our year-end target for the USD/MYR is 3.21 (2014 average: 3.25).
- The current account balance surplus widened to RM19.8b in the 1Q14 from RM14.8b in the previous quarter. As a result, its share of Gross Domestic Product (GDP) rose to 7.7% from 5.6% previously.
- One of the contributors for the wider 1Q14 surplus is due to a slightly higher surplus in the good accounts, which widened to RM33.6b from RM33.3b in the 4Q13. This is due to lower imports, which recorded RM144.9b from RM148.3b in the last quarter as a result of lower imports of capital goods. Exports also slowed in the 1Q1 recording RM178.4b from RM181.7b in the 4Q13. Nonetheless, it still managed a wider surplus on continued demand fro electrical & electronic products, LNG and petroleum products. The biggest chunk of shipment went to China, Singapore and Japan.
- However, exports of services decreased in the 1Q14, to RM32.6b from RM34.4b. Similarly, the imports of services also fell, to RM35.3b from RM38.5b previously This led to a lower net payment of RM2.7b, from RM4.1b in the 4Q13.
- The financial account for the 1Q14 recorded a higher net outflow of RM37.6b from RM9.8b in the 4Q13. This is on account of a net reversal of direct investment (-RM14.6b from +RM4.0b) and outflow in portfolio investment (-RM13.4b from –RM0.8b). For many emerging economies, the 1Q14 still suffered from capital outflow, on capital tightening worries surrounding the QE tapering from the Fed. Capital has been moving back towards developed economies again, on expected economic rebound in the US, UK, parts of Europe and Japan. However, the trend is beginning to slowly return to the steadier emerging economies such as Malaysia. Nevertheless, Malaysia’s domestic institutional players dominate the market, and have managed to keep liquidity sufficient and the financial system steady regardless of capital flows.
- Direct investment registered a net outflow of RM14.6b from a net inflow of 4.0b in the 4Q13. Foreign direct investment recorded a lower inflow of RM7.0b from RM11.4b in the 4Q13. This was mainly channeled into mining, financial & insurance and information & communications. The top three sources of FDI were the Netherlands, Hong Kong and France.
OUTLOOK
- As mentioned above, regardless of the capital outflow, Malaysia’s domestic capital market has got the dominance, liquidity, instruments and financial capability to mitigate the flow. In addition to that, we have already begun to see consecutive inflows in the capital markets again, albeit in smaller amounts compared to the previous year. In addition to that, continued strength in exports this year should be able to keep the current account comfortable in a surplus, heedless of the on-goings in the financial markets.
- With the case of the MYR, it has been gaining strength of late, in tandem with capital flowing back into the country. However, downward pressure still remains, as expected improvements in the US will continue to strengthen the dollar. On the flipside though, a rebound in US demand means continued improvement of Malaysia’s exporters’ earning and improving trade surplus.
- Though the near term will see continued volatility, there is underlying strength to the MYR and backed by a better economic prospect this year, positive current account balance, low external debt, along with implementation of policies to tackle fiscal debt and deficit, Economic Transformation Programme (ETP) projects running more or less on schedule, a well structured financial system and favourable outlook from the IMF and rating agencies, we do believe that the currency has every capability to regain its strength.
- However, the MYR strength would continue to face downward pressure on the expectation that the Fed may hasten the QE tapering and the market reaction by switching back to safe haven assets backed by the US dollar. Our year-end target for the USD/MYR is 3.21 (2014 average: 3.25). This also takes into account the recent move by the PBOC to widen the yuan trading balance which was a deliberate move to weaken the currency and punish speculators. Following this, we expect that the regional currency, including the ringgit, to move in tandem and remain volatile with a downside bias over the short to medium term.
Source: Kenanga